Four Common Ways to Price Marketing Services
Let me guess, you’ve put out an RFP for a new agency and now you’re staring at three different proposals. One agency wants to charge you a percentage of ad spend. That makes sense — you’re hiring them to place ads for you. Another wants to pay as they go. Yet another requires a monthly retainer. Why does it vary so widely?
Remember: The marketing agency you hire should earn you a return on investment. They should take on your goals and find opportunities to grow your business. From this perspective, one model might make more sense for you than another. The three most common pricing models allow clients to pay hourly, per project, or based on a percentage of paid media spend. You may have also heard the term “value-based pricing.” We’ll cover that as well. So what’s the best option? We certainly have our favorite, but before we show you any bias, let’s break down each one.
Hourly Pricing Model
In this model, your agency partner will scope requested services based on how many hours they believe the work will take to complete. Some agencies allow clients to pay for these marketing services based on “time and materials,” meaning that they will only bill for the work completed. Other agencies work with clients to plan and scope an annual marketing strategy. They estimate the entire year’s work and divide it across the twelve months of the year. In this method, instead of variable charges each month, a client commits to a consistent monthly agency fee.
Product Based Pricing
Sometimes a business doesn’t need ongoing marketing support. Instead, they call on an agency to handle a specific, challenging project. In this case, project-based pricing may work best. The agency develops a scope for the specific effort with measurable milestones and specific timelines. They base their pricing on the amount of work necessary to complete each milestone at a fixed fee. Changes to the scope require written change orders and will adjust the total price costs. When a milestone is complete, the agency issues an invoice and then continues to the next phase. This repeats until the project is complete. Then should the client decide to work with the agency on another project, the process begins once more.
Percent of Media Spend
This pricing model is very common among digital marketing agencies offering paid media services through platforms like Google Ads, Bing Ads, Paid Social efforts, and other PPC campaigns. In this model, the advertising agency negotiates their fee as a percent of the client’s total paid media budget. This typically ranges between 15% and 20% of the ad spend. Often, this pricing model only includes the work required to manage that ad spend and does not include any other marketing efforts. When other needs arise around things like inbound marketing, content creation, email marketing, or brand awareness, the partners negotiate a separate project-based, fixed fee, or establish an additional marketing retainer.
In this pricing model, the agency calculates a fee based either on the perceived value or actual value created through a certain marketing campaign or digital marketing service. This can often lead to friction between client and agency, as the perception of this value by agency and client doesn’t always line up.
Marketing Retainer vs. Percent of Media Spend
While you’ll see all four pricing models detailed above, the two most common models used by agencies today are the contracted, monthly marketing retainer, and management fee based on the percent of media spend.
Here’s where our own bias comes into play. Here at Level, we believe that the monthly retainer model offers distinct advantages for client and agency alike.
A retainer fee:
- allows for more predictable budgets
- avoids moral hazard
- gives the clients more flexibility in terms of deliverables
- enables greater access to a cross-functional marketing team
- provides a client with a greater ability to track overall marketing ROI, not just digital advertising ROI
A monthly marketing retainer offers more predictable budgets. With an agency partner taking a percentage of media spend, companies can never know how much they will ultimately end up paying. This can make it difficult to plan and allocate resources. On the other hand, a monthly retainer gives the company a fixed fee that they can budget for a month-to-month basis.
Basing Fees On Spending Introduces Moral Hazard
Monthly marketing retainers keep everyone honest. In general moral hazard occurs when one party is insulated from the consequences of their actions. If you base agency fees on a percentage of media spend, they may be less likely to be judicious with how they allocate those resources. I.e. — they spend more, they make more. On the other hand, paying a monthly retainer fee gives them the incentive to be more efficient and effective with their spending in order to justify their fee.
Flexibility in Deliverables
Another major benefit of paying a monthly marketing retainer is that it gives the company more flexibility in terms of deliverables. With an agency partner taking a percentage of media spend, they may be inclined to prioritize activities that generate more revenue. However, if the company is paying a monthly retainer fee, they can work with the agency to prioritize the work that delivers the most bang for their buck.
Access to Cross-Functional Marketing Team
When companies retain an agency on a monthly basis rather than paying them a percentage of media spend, they also gain access to a cross-functional marketing team — not just media buyers. This team can help with everything from planning and strategy to execution and analysis. As such, companies get much more value and expertise for their money when retaining an agency on a monthly basis.
Greater Ability to Track Overall ROI
Finally, another key advantage of opting for a monthly marketing retainer is that it provides companies with a greater ability to track overall ROI. Retaining an agency helps companies assess whether or not an agency is truly providing value for money on an ongoing basis. If not, they can take steps to rectify the situation, or find another agency that better meets their needs. Assessing ROI based on media spend, on the other hand, gets tied up in the fluctuations in advertising costs. Not an easy task.
Which agency fee model is best for you?
As we said, we’re biased. Paying a marketing agency based on media spend encourages them to spend rather than perform. It’s tough to measure and focus on one service. Hiring an agency partner on a retainer model offers flexibility, dependability, and measurability. It also incentivizes efficient use of your resources — that agency is out to prove that they can grow your business. If you’re looking to partner with an agency, make sure your fee model delivers value.
Still have questions? Contact us and let’s talk about it.